Market insight – a positive month
In our market insight this month we highlight February as a positive month for major equity markets with Japan and Europe leading the way in growth asset returns. Financial markets are re-assessing their views on interest rates and how much they might be cut in 2024.
Economic data increasingly suggests serious recessions can be avoided which is good news for corporate earnings and the net result has been upward progress for global equity markets.
Economic overview
Starting with the economic overview, the global economy continues to perform slightly better than the consensus had expected, but inflation is not declining as quickly as many have hoped. The UK, European and Japanese economies continue to flat line, whilst in contrast, expectations about the US economy are stronger with around 2-3% growth expected in the spring. Financial conditions appear harsher in the UK and Europe, as shown by mortgage pressures or bank lending surveys. Conversely, US households and companies look to be responding better, with companies in robust hiring mode, helped of course by the US Government running a budget deficit of over 7% of GDP.
As 2 and 10-year bond yields signal, there has been a noticeable reassessment of how far and fast rate cuts will appear this year. The first stage was the push back from central bankers, such as firm statements from Jerome Powell. The second was the latest sets of core inflation data suggesting that underlying inflation pressures are just not declining fast enough.
Although headline inflation continues to slow, there are still concerns about core inflation in the US and the UK. However, on the back of such growth & inflation data, there is an opportunity for global earnings growth to pick up moderately over the next 12 months and this is helping the current growth asset momentum.
Growth assets
Turning to growth assets, within the US stock market, investors continue to debate how to approach the Magnificent 7 stocks, now 25-30% of the total US market, so about 15% of total world equity. The distinction between winners and losers is growing more noticeable;
Nvidia goes from strength to strength on AI chip demand, whilst Tesla’s value has declined significantly on growing Chinese competition.
In the last 12 months, the Global index rose about 13% but the equal weighted version fell 6%. The average US stock is trading at 21 times earnings but this is biased by big cap stocks and interestingly the equally weighted basket is only 16 times. However, the ‘soft landing’ narrative continues to encourage investment in growth assets.
Factor performance & defensive assets
Turning to factor performance, it was the momentum factor that was the best performer over February, with Value the relative detractor.
Turning to defensive assets, US and UK 10-year treasury yields have risen this month due to the reassessment of how far and fast rate cuts will appear this year. One further explanation for rising bond yields may be sizeable debt issuance in the US.
More generally, global debt reached a record $300 trillion in Q3 last year, now over 330% of world GDP.
Market insight February – summary
In summary, markets have shallow recession priced in, but investors are starting to believe the soft landing rhetoric in the US. We continue to maintain a diversified approach to asset allocation as we move through Q1 with an eye on some equity valuations.
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